$11.9 billion asset

Assessment review panel pumps up value of trans-Alaska pipeline system

Wesley Loy

For Petroleum News

The State Assessment Review Board has pegged the value of the trans-Alaska pipeline system at $11.9 billion, a big upward adjustment from the state Department of Revenue’s valuation.

The panel faulted the state’s petroleum property assessor for making “fundamental errors,” including how much crude oil remains to be produced and shipped from the North Slope.

That’s a key factor in calculating the value of TAPS — more important than its physical condition, the review board said.

“The TAPS is very well maintained, and as long as it is maintained, it will not wear out,” the board said in its May 29 decision. “The remaining life of the TAPS, therefore, depends on when the supply of oil will be so diminished that it will no longer be economical to ship oil on the TAPS.”

That won’t happen until 2066, when production — according to the best long-range forecast — is expected to fall to the lower limit of 100,000 barrels per day, the board said.

Current throughput on the pipeline is around 550,000 barrels per day.

Fluctuating valuations

The review board, appointed by the governor, hears oil and gas property tax appeals.

The trans-Alaska pipeline carries crude oil 800 miles from the North Slope oil fields to the tanker terminal at Valdez. It has operated since 1977. The major owners are BP, ConocoPhillips and ExxonMobil.

Department of Revenue officials annually assess the value of the pipeline system for property tax purposes. In recent years, these assessments have led to court battles.

The pipeline’s value, as set by the department, the board and the courts, has fluctuated widely over the years. Valuations have ranged from $6.1 billion in 1977, to under $3 billion in 2000, jumping to almost $10 billion in 2006.

For 2013, the Department of Revenue assessed the pipeline system at about $7.2 billion.

The pipeline owners appealed to the board, and argued the system was worth no more than $2.25 billion. Municipalities through which the pipeline passes, and that share in property tax collections, also appealed, asserting a system worth of at least $13 billion.

In its 35-page decision, signed by chair Don Martin McGee, the review board put the TAPS value at $11,874,014,300.

Dueling reserves estimates

The state petroleum property assessor’s 2013 TAPS assessment was “improper,” largely because of two fundamental errors, the board said. The assessor is an official in the Department of Revenue.

On each error, the assessor departed from the prior rulings of a Superior Court judge without providing justification, the board said.

First, the assessor elected not to adopt the replacement cost study the court favored as the basis for the assessed valuation. Instead, the assessor blended the results of this and another cost study, which was improper, the board held.

Second, the assessor failed to base his estimate of proven North Slope oil reserves on the best evidence, the board held.

The Superior Court had accepted Platt’s estimate, and the board said it also found Platt’s forecast to be the best.

Molli and Platt use different methods for estimating proven reserves. Molli bases his predictions on production from existing wells or wells immediately planned, the board said. Platt, who formerly was the Department of Revenue’s consultant, does pool-level forecasts that take a broader view of field development.

Platt in the past consistently overestimated the near-term production of reserves, the board said. But for evaluating the remaining life of TAPS, the Platt approach wins.

“As the Superior Court found, the pool method is a better methodology for estimating long term production,” the board decision said.

Tariff or replacement value?

The board decision discussed the wide gap between what the owners believe the pipeline system is worth, and what the state and municipalities say.

The owners contend the pipeline should be based on its stream of tariff income for moving oil.

But the board held that TAPS “was not built for the tariff income that it would generate.” Rather, it was built to transport oil belonging to affiliates of the owners. And if it were necessary to replace TAPS, the owners would spend “much more” than the present value of the tariff income the pipeline would generate.

In conclusion, the board said the Department of Revenue had “adopted several new approaches to valuing the TAPS in 2013.”

It improperly blended the cost studies, rather than relying on the one the court favored, and “used a production forecast that failed to account for billions of barrels of proven reserves” the court found to be available for transportation through TAPS, the board said.

Thus, the board adjusted the valuation of TAPS to $11.9 billion, up substantially from the department’s assessment of $7.2 billion.

The board decision may be appealed to the Alaska Superior Court within 30 days.